A Changing Climate for Proxy Advisory Firms: Developments in the US and Canada

The role of proxy advisory firms in the marketplace has been a focal point on both sides of the border as recent guidance by the US Securities and Exchange Commission (SEC) and the Canadian Securities Administrators (CSA) highlights the powerful influence of proxy advisory firms and need for increased accountability and transparency.

In the US, the SEC Staff released a bulletin in June entitled Proxy Voting: Proxy Voting Responsibilities of Investment Advisers and Availability of Exemptions from the Proxy Rules for Proxy Advisory Firms (the Bulletin) which places some onus on the investment advisor, as part of his or her fiduciary duty to the client, to ensure that in acting through proxy advisory firms, sufficient oversight is provided to advance the best interests of the client. The investment advisor must assess proxy advisory firms’ “capacity and competency to adequately analyze proxy issues” on an ongoing basis by ensuring that the proxy advisory firm has current and accurate information as well as the ability to identify and address any conflicts of interest.

In August, SEC Commissioner Daniel M. Gallagher published a working paper entitled Outsized Power & Influence: The Role of Proxy Advisers, contending that the Bulletin did not go far enough in recognizing that “the investment adviser industry has become far too entrenched in its reliance on [proxy advisory] firms”. He goes on to suggest a fundamental review of the role of proxy advisory firms including the possibility of reforms such as the implementation of a universal code of conduct, emphasis on increased transparency, appropriate approaches to dealing with conflicts of interest and an overall increase in accountability. Commissioner Gallagher clarifies that the SEC’s role would not be to regulate proxy advisory firms but, rather, to promote best practices.

In Canada, the CSA released for comment a proposed National Policy 25-201 Guidance for Proxy Advisory Firms(the Policy) in April. The Policy emphasizes the need to effectively identify and mitigate conflicts of interest, ensure transparency and accuracy in vote recommendations, develop proxy voting guidelines through consultative processes, and promote proper management of communications with clients, market participants, the media and public. The comment period for the Policy was closed in July and it remains to be seen how the CSA will proceed in addressing the role of proxy advisory firms in the Canadian marketplace. An in-depth overview of the proposed Policy can be accessed here.

As the 2015 proxy season approaches, proxy advisory firms, investment advisors and corporate issuers would be prudent in assessing their current practices pertaining to proxy advisory services, taking into consideration the increasing scrutiny with which such services are being viewed.

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